Frontiers of Entrepreneurship Research
1997 Edition


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1Nancy B. Upton
2J. William Petty

1Baylor University
Waco, Texas 76798

Telephone: 1817-755-2265, 2817-755-2260
Fax: 1817-755-2271, 2817-755-1092

Principal Topics
It is believed that over the next decade an unprecedented number of family firms will be transferred to a subsequent generation or sold to third parties.  While accurate numbers are hard to come by, it has been estimated that there are at least 2 million family firms with revenues greater than $1 million (Forbes, 1989).  Dreux (1990) suggests that one could conservatively estimate that there are 1.7 million business entities that are family-owned and controlled excluding sole proprietorships.

In 1990, Fortune magazine reported that the estimated value of capital invested in family and closely-held businesses in the United States was $2.4 trillion.  They also noted that a majority of those businesses remain under the control of entrepreneurs who founded their firms after World War II and the Korean Conflict.  Within the next 10 to 15 years, virtually all of the members of this family business generation will die or retire and the transfer of capital from one generation to the next may be the largest in the country's history.  In this regard, annual bequests are expected to rise from $84 billion in 1995 to $143 billion in 2000 to a high of $335.9 billion in 2015.

The effect of the transition of wealth from the founding business owner to the next generation has led the financial community to question whether sufficient capital will be available to finance the necessary transactions. Fay (1994) expresses reservations that enough capital will be available to finance so many transactions within such a short time period and at prices considered adequate by the family owners.  Yago (forthcoming) notes that highly leveraged transaction loans declined by 40 percent resulting in $38.2 billion less in acquisition related debt available from commercial banks.  These sources of debt had been used extensively for ownership change for firms with retiring owners.  Moreover, there is the possibility of a shift in funding among venture capitalist from high-growth firms to transition funding.  A number of venture funds have identified the family business transition market as their major focus.  Conversations with fund managers indicate the possibility of a large transfer of funds from start-up and second stage to transition funding in future years.  The prospect of funding a mature, proven entity is thought to be very attractive to these managers.

This research addresses the issue of transition financing by reporting the results of a national, random survey of venture capitalists.  These financiers were questioned regarding their plans to  participate in transition funding and the qualities a family-owned business transfer would have to possess to receive funding.  Also, we inquired into the impact, if any, on emerging and growth firms as they compete for capital with a whole class of companies heretofore ignored.

Major Findings

The results to date are limited to early survey returns from venture capitalists.  However, based on these responses, the findings offer some clear suggestions, namely:

Preferred stock and common stock are the primary types of family transition financing used.  When preferred stock is used, the investor will invariably have the right to convert into common stock. 
The targeted rate of return for most investors providing transition financing falls within a narrow band around 35 percent. 
Venture capitalists as a general rule insist that a planned exit strategy be in place. 
In evaluating this type of investment opportunity, investors view the availability of a qualified successor to be a critical factor in the decision, while having outside directors is of little importance. 
Venture capitalists perceive family-managed firms as better performers financially than nonfamily-managed firms. 
Venture capital investors believe there will be an increase in family firm transition financing in the next decade. 
The complete survey results will be available in the final study. Also, in the future, family businesses will be surveyed to assess their plans regarding transition strategies and their perceptions as to the barriers they will face in accessing the venture capital market for this purpose.


Indications suggest there will be a significant number of family transitions in the decade ahead, more than ever before.  If these transitions are to be effective-creating economic value for all concerned?their needs to be adequate preparation by the families and independent investors involved in these transactions.  A critical element in this process will be the acquisition of adequate financing to consummate the deals.  For this to occur, we will need to gain a greater understanding of the process than we have at present.  Failing to do so will result in large sums of value that is currently locked up in family-owned companies not being realized by the individuals who built and grew these firms.  Equally important, it could deny the next generation from building on the foundation laid by the founders.

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